Cereal Buyers Getting Milked? Study Says Breakfast Food Industry Gouging Consumers

Gone cuckoo over the price of Cocoa Puffs lately? Felt your blood boil after shelling out $4.49 for the two scoops of raisins in every box of Kellogg’s Raisin Bran?

So, too, have members of Congress. On Tuesday, Rep. Charles Schumer, D-N.Y., an avid muncher of Cookie Crisp and Frosted Flakes, called for a Justice Department antitrust investigation into the handful of companies that control the $8 billion U.S. cereal industry.

The reason? Cereal prices are way too high, they said, and consumers - who chomped their way through two billion boxes last year - have little choice but to pay them.

In contrast, the cereal industry maintains that its product is a bargain.

“Consumers are getting ripped off at checkout counters all across the country,” Schumer said at a press conference, standing behind a table lined with brightly colored boxes of Froot Loops, Crispix and Cap’n Crunch. “The free market isn’t working. … We’re paying caviar prices for Corn Flakes quality.”

According to a study released by Schumer and Rep. Sam Gejdenson, D-Conn., the cost of Rice Krispies, Sugar Pops and other cereals has gone up 90 percent in the past decade, an increase two times higher than the price hike for other foods. If cereal prices had just kept up with inflation, consumers would have saved about $1.7 billion in 1994 alone.

And most of that money hasn’t gone into making nuttier, crispier, crunchier Wheaties. Instead, more than half of the price of a bowl of Cheerios, for example, goes to the ads that blare during Saturday morning cartoons, coupon promotions and profits, Schumer said.

Indeed, Kellogg’s, General Mills, Post/Nabisco and Quaker Oats - the four companies that produce most of the 200 cereal brands that fill entire shopping aisles - enjoy a profit margin of 17 percent of the price, one of the highest in business, Schumer said, and three times higher than the average manufacturing industry.

The cereal industry also comes just behind tobacco and greeting cards for having the widest gap between production costs and price, Schumer said.

In their letter to Attorney General Janet Reno, Schumer and Gejdenson asked the Justice Department to look into whether the four companies are colluding to keep prices and profit margins high and to keep new companies and cheaper private label cereal brands frozen out of the market.

One industry analyst agreed that the cereal industry is a “nice margin” business, but that’s the way of American business.

“If they want, they can bring to trial the American capitalistic system,” said Nomi Ghez, an analyst with Goldman Sachs & Co. in New York.

A cereal industry spokesman disputed the study’s figures and conclusion. Jeff Nedelman, vice president of the Grocery Manufacturers of America, “Makers of Your Favorite Brands,” said the cereal industry is indeed competitive and that prices have not even kept up with inflation once coupon discounts are factored in. “We think food is a bargain in this country,” he said. He would not offer profit and advertising figures.

Industry analysts agree that the intense competition among the four cereal makers does not result in lower prices, but in ever-newer products, incarnations with raisins, almonds, cinnamon or added fiber.

And it is this very explosion in new products - the number of cereal brands has doubled in the last decade - that drives up the advertising costs. Analysts estimate it takes about $50 million to launch a new cereal. And, because about three out of every four new cereal products fail, companies scramble to make versions to keep on top of their market share, analysts said.

The plethora of brands also works to keep the cheaper private label brands, Fruit Rings instead of Froot Loops, out of the lucrative breakfast game.

“There are such high entry barriers it’s hard for others to get in and produce a cereal,” said Ron Cotterill, an agricultural economist at the Food Marketing Policy Center in Connecticut who worked on the study. “It’s actually easier to make a computer than it is to make a breakfast cereal.”

Although cheap, soggy, cardboardtasting generic-brand cereal failed miserably in grocery stores about 10 years ago, private label cereal, sold under Safeway or other store names, is now made by Ralston and MaltoMeal in some of the very same facilities with name-brand cereals. And, unlike a decade ago, they have captured about 8 percent of the cereal market.